Assignment File 13

Assignment 2
Due date: 20 April 2024
Weighting: 25% of the total marks for this course

Question 1 (20 marks)

a Ivan and Emily are the only consumers in an economy where apples
and oranges are the only goods they consume. The marginal utility
(MU) schedules for each of the goods are as follows:

Apple MU(Apple) Orange MU(Orange)

1 20 1 29

2 17 2 22
Ivan
3 13 3 15

4 8 4 8

5 2 5 1

Apple MU(Apple) Orange MU(Orange)

1 23 1 17

2 17 2 12
Emily
3 12 3 9

4 7 4 7

5 1 5 6

Ivan has three apples and five oranges while Emily has five apples
and three oranges.

i Explain why the current allocation is not Pareto optimal.

(6 marks)

ii Explain how Ivan and Emily can achieve a Pareto improvement.

(8 marks)

b Suppose two individuals have exactly the same preference and

identical endowments. Does it follow that they cannot trade to mutual
advantage in a world of pure exchange? (6 marks)
14 ECON A311 Intermediate Microeconomics

Question 2 (24 marks)

a A monopolist firm sells its product in two different regions: Region A
and Region B. The demand functions and marginal revenue functions
for Region A and Region B are as follows:

Region A: QA = 800 – 0.25PA MRA = 3200 – 8QA

Region B: QB = 240 – 0.20PB MRB = 1200 – 10QB

where PA, QA and MRA are the price, quantity of output and marginal
revenue for Region A respectively, and PB, QB and MRB are price,
quantity of output and revenue for Region B respectively. The
marginal cost is constant at $200 per unit of output and the fixed cost
is $80,000.

i Calculate the optimal prices and output of each market

respectively if the monopolist can price discriminate. (12 marks)

ii Calculate the firm’s total profit for the two regions. (4 marks)

b Explain why the marginal cost curve is not the market supply curve in
the monopoly market. (8 marks)

Question 3 (30 marks)

The market demand function for the peanut is:

Q = 190 – 0.5P

Suppose there is no fixed cost in producing peanuts and the marginal cost
is constant at $20.

a What is the economically efficient output level and price? (4 marks)

b If there are only two sellers in the market:

i What is the output level, profit and price for each firm under the
Cournot equilibrium?
(The marginal revenue functions of Firm 1 and Firm 2 are
MR1 = 400 – 4Q1 – 2Q2 MR2 = 400 – 4Q2 – 2Q1
where MR1 is marginal revenue of Firm 1, MR2 is marginal
revenue of Firm 2, Q1 is output of Firm 1, Q2 is output of Firm 2.)
(12 marks)

ii Find the Bertrand equilibrium output level and profit for each
firm. (6 marks)

c If there is only one seller (Firm 1) in the market, find the market
output and profit.
(The marginal revenue of the seller is MR = 380 – 4Q.)
(8 marks)
 Assignment File 15

Question 4 (26 marks)

a Firm A and Firm B decide to launch their new products in the market.
Each firm can choose to either sell the product at a high price (H) or a
low price (L). The estimated payoff table is as follows:

Firm B

L H

Firm A L (250, 150) (280, 130)

H (140, 180) (270, 190)

(Firm A’s payoff is given before the comma, and Firm B’s payoff is
given after the comma.)

i What are the dominant strategies (if any) for Firm A and Firm B
respectively? (6 marks)

ii What is the Nash equilibrium outcome, if any? Explain. (4 marks)

iii If Firm A can decide on what strategy to use first, what will be
the Nash equilibrium (if any) of this sequential game? Explain
with the aid of a tree diagram. (8 marks)

b Explain why the market of health insurance is less efficient with the
presence of asymmetric information. (Assume the insured knows
more about his/her health condition than the insurance provider.)
(8 marks)